A Simple Explanation of Modern Banking Customs

by Humphrey Robinson

Say he has brought in $100,000.00 worth of checks against the other nineteen banks, and they have brought in $90,000.00 worth of checks against his bank. Then his bank has a credit at the Clearing House of $10,000.00.

After the Manager figures up from these totals handed him by the different bank clerks, he finds that certain banks brought more than was brought against them, and that certain other banks brought less than was brought against them. In other words certain banks have "lost" at Clearing while others have "gained" and at a later (designated) hour of the day, the debtor banks pay in their losses at the Clearing House and the creditor banks receive their gains, the total losses and gains, of course, exactly offsetting each other.

While the systems employed at the Clearing Houses of the various cities of the United States may vary in some particulars, they are all founded on the principles stated in the preceding paragraphs. These principles have been so perfected that the clerks from the different banks are at the Clearing House for a few minutes only each day. The Manager imposes a fine of several dollars on the bank for every mistake in calculation its Clearing House clerk makes; also for tardiness.

To return to the checks which have been brought back from the Clearing House. If, on examination, the Paying Teller has discovered any forgeries, or irregular or missing endorsements, or anything suspicious about any checks; or if the bookkeepers have found that any check overdraws the account of the depositor, the bank has only until the close of banking hours to return such checks and collect from the banks that sent them through the Clearing House. So the examination of these checks must be made carefully and very quickly.

The "Clearing House Association" in your city is what might be called a Mutual Aid Society, which the banks have organized for purposes of mutual convenience and protection. This Association pays the expenses of the Clearing House; the Manager's salary; the rent; etc. It adopts rules and by-laws and fixes fines and penalties for breaking them. But it is not an incorporated body and can not sue or be sued.

In time of panic, the Association is a tower of strength, not only for the banks themselves, but for the whole community. The associated banks, at such times, have it in their power to make or break the business interests of their city. But their interests are identical with the interests of their patrons. Remember the banks are owned by the people, not by two or three private individuals. The failure of any one bank, or of any one business house, increases the panicky feeling. Therefore, the Clearing House Association naturally and from very self-interest, must do its utmost to keep its members and their customers on their feet. In financial storms, the Association may adopt certain rules and regulations which may seem unreasonable to the public; but these methods are put in force for "the greatest good of the greatest number"; not only for the protection of the banks, but of their customers and depositors. It is a time for the public to be as reasonable as possible; to uphold the banks and their officers and directors. It is a time for the public and the banks to come closer together. Rest assured the banks have no desire to see any firm or person fail in times of panic, or any other time. They make their largest dividends when business is brisk and everything is prosperous.

What every Clearing House Association does want to wipe out, however, is the dishonest and reckless banker. He is a menace and source of anxiety to every bank in the community. The sooner the other banks can detect and expel him from the business, the better. In some cities, notably Chicago and St. Louis, the Clearing House Association regularly employs expert accountants to make periodical and unexpected examinations of the banks in the Association. If any bank is found to be doing a reckless business and not living up to the rules and regulations of the Clearing House, it is heavily fined or expelled. And expulsion from the Clearing House means ruin for that bank as soon as the business community learns of it. All Clearing House Associations should adopt this strict supervision.

Many a bank was saved embarrassment and possible failure in the recent panic of 1907 by the wise methods put into effect by the Clearing House Association. Selfishness and enmity were ordered to the rear. There are always banks whose officers have less foresight and wisdom than others. Some of these had been lending too freely, and their actual cash reserves were not sufficient to meet the storm of checks of their frightened depositors; frightened mainly because of ignorance, for, with a few exceptions, the banks were in good condition. To call in their loans and replenish their supply of cash would cause business failures and add to the panic.

So the Clearing House Associations of the different cities determined that the strong and wise banks should help the weak and foolish ones. Loan Committees were appointed to sit daily at the Clearing House. The various banks brought to this Committee notes they had discounted, or stocks and bonds owned by them. If the Committee thought them good, the Clearing House Association would lend the bank bringing them, up to about 75% of their face value. Of course, the Clearing House Association did not lend these banks actual cash, but they issued them Clearing House certificates, bearing interest, which could be used among the banks in settling daily claims against each other; just as if the banks had deposited actual cash at the Clearing House. In this way, if Bank Number One had the Clearing House Manager's check on Bank Number Two for $50,000.00, in settlement of some daily balancing at the Clearing House, Bank Number Two could pay Bank Number One with Clearing House certificates instead of actual cash. In other words, the banks which had a number of good notes, or stocks and bonds, but a small amount of cash, were saved by the combined, unselfish and patriotic action of all the banks working together for the common weal.

If the public generally knew of the many instances of generosity and unselfishness that were shown in the Clearing Houses in this and other panics, the banks, as a class, would not be denounced and condemned as they sometimes are. And this unselfishness was not exercised by the banks for the salvation of the banks alone, but for the business interests of the whole community as well; for, as has been pointed out, the interests of the banks and the people are one.